(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us. Please right click on images to see them larger in a separate tab. Click on the Index Topic Name at the beginning of each post to see more posts on that topic on PC or Laptop.)

Photo: heartlandhospice.com

Midwest farmers are declaring bankruptcy at a rate not seen since the Great Recession. As prices for corn, soybeans, milk and corn decline to decade lows, the Minneapolis Federal Reserve reports that Chapter 12 bankruptcy filings in 5 states of the Ninth District.

The Federal Reserve notes that based on the level of bankruptcies and the trajectory of the increase that bankruptcies will only increase. The government shutdown is exacerbating farmland pain. The Trump administration announced last summer $12 billion in farmer subsidies. But, because of the shutdown many farmers applying for subsidies and loans to plan for spring planting are not receiving the money they need. Many farmers and agriculture businesses are affected by the Department of Agriculture shutdown versus coastal states as shown below.

Source: Axios – 1/12/19

China turned to Russia and Brazil for soybeans in particular in the 4th Qtr of last year. US sales to China dropped to almost zero. As a negotiating tactic, China last week did pledge to buy more soybeans as traders in Chicago noted last week an increase in sales orders. However, when China switched purchases to major suppliers last year it will be difficult for US farmers to unhook those deals already in place. As one farm owner noted, “ it just seems like it’s one thing after another, over and over.”

Heartland challenges have actually been going on for years even before the Great Recession with the loss of millions of manufacturing jobs since China joined the WTO in 2000. The rural regions of the country have seen their wages grow at half the rate of metro areas. The opioid epidemic has cost thousands of young workers future careers, unemployment is twice what it is in the East and West. The digital internet infrastructure in rural areas is quite often at analog rates 4 times slower than broad band. Companies are at a disadvantage versus their metro competitors with slow bandwidth. Rural region hospitals are closing at an increasing rate leaving many rural people with hundred mile or more drives to the nearest emergency room. Life expectancy in Mississippi is the same as Libya. Heartland America has been left out the metro mainstream economy for the past 20 years. Our post – The Hallowing Out of Heartland America shows how rural regions have fallen behind in many infrastructure areas including: healthcare, Internet bandwidth, jobs, education with limited upward mobility for young people.

Next Steps:

The Heartland Venture Marshall Plan is similar in concept as the Marshall Plan deployed by the U.S. to rebuild the infrastructure of Europe after WWII, but instead of a government bureaucracy the Silicon Valley style innovation venture model is used. Venture development is designed to start small, build on successful prototypes and use multiple sources of funding to gain as much support as fast as possible to make the venture a success. Failure is part of the success fast, try several prototypes, do it, tweak it, try it again until it works or achieves the goals we set for the venture.

Here is a summary of the idea from our post of September
2017:

“We propose
building a startup
non-government organization. We are recommending a difference approach by the
Federal government to act as an investor in a non-government organization
called a Heartland Development Center.
An HDC acts as a central hub of critical services and infrastructure
development while providing a continuous innovation system. The Heartland Development Center acts as a
catalyst creating an innovation ecosystem to jumpstart local economics and
social structures. HDCs would focus on all the key issues that a region
needs to address to rebuild their economy and people’s lives: business
formation, education and training, digital infrastructure, affordable housing,
engaged local innovation media and health care.

The Federal government would seed the financing of these NGOs in key regions with additional funding from local and state governments, and major corporations who would benefit from the newly available job force tuned to their needs. HDCs would be ‘startup’ organizations installed at Land Grant universities bringing in leaders in their respective fields – ie. business formation – Y Incubator, preventive health – Cleveland Clinic, or training – Opportunity@Work as contractors to the HDC. These NGOs would establish continuously renewing innovation processes to stay in touch with their citizen – customers and businesses. Administration services would all be contracted using cloud software services for HR, Payroll, Training, Benefits and other internal systems to keep costs down. The HDC startups would be piloted in 3 non metro areas, where they would tune their business and socio economic models for maximum impact, then use those working models to implement HDCs in 25 or more other key regions for 5 – 10 years.”

There is one indicator of the desperation that many rural people feel is the fact that the opioid epidemic has a 50 % greater incidence in the Heartland than in our metro or coastal cities. We need to be building bridges through programs like the Heartland Venture Marshall Plan between our coasts and the inland empire to bring together our people developing consensus and shared experiences. Each HDC would be staffed by a equal mix of apprentice and college graduates from local rural education systems and metro university graduates. They would comprise a ‘Heartland Service Corp’ modeled on the AmeriCorp program with a benefit of complete forgiveness of student debt for two to four years of service depending on the debt balance. We would be building shared experiences of our young people to bridge the gap between inland and coastal cultures. These young people can innovate new opportunities to create an economic future that works for all.

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab. Click on the Index Topic Name at the beginning of each post to see more posts on that topic on PC or Laptop.)

Image: investopedia.com

The present euphoria about the U.S. being able t0 win a trade war with China is fueling the stock market to new highs. While, consumers reading the tariff headlines are beginning to pull up purchases scheduled for a later time. This author talked with a consumer who heard that tariffs were going up 25 % in January, 2019 so she wanted to move her purchase of a refrigerator up to now just in case. She didn’t know if refrigerators were even going to be taxed or if the tariffs were going to happen for sure. The tariffs are creating a buying contagion. This buying fever is catching on with businesses too, as the West Coast ports report 4 times the normal amount of freight volume being offloaded last month.

This urgent pulling forward of buying has happened before on a large scale in the U.S. in 1999. The year 2000 fear that software would not be able to handle the switch from 1999 to 2000 due to program limitations triggered both corporate buyers and consumers to purchase new hardware and software that would fix the bug. Sales were pulled forward into 1998 and 1999 then in 2000, sales dropped fast ‘like the lights were turned out’ the CEO of HP, Carly Fiorina said.

Source: Statista, 9/23/18

Computer software and hardware sales in stores fell 20 % by 2000 and another 19 % the following year. Computer and software companies laid off workers, companies with high levels of debt defaulted and a recession ensued. Note that even as sales began to come back up by 2008 another recession hit slowing sales progress until reaching par level with 1998 in 2011.

Consumers and businesses are hit by the tariffs in several ways: first, they see prices go up due to contagion buying from fear of prices going up, second there is a lack of merchandise as suppliers run out of product and finally when tariffs kick in the buyers are hit with another rising price wave.

Next Steps:

We have outlined in earlier posts the disastrous effects of broad trade tariffs with no clear goal in mind hurting consumers and businesses alike with high prices, loss of contracts and reduction in jobs. The latest round of tariffs on $200 billion in Chinese goods is ratcheting up the war to a new level with China retaliating with $60 billion in tariffs against U.S. goods. Plus, many businesses report non-tariff barriers being thrown up by the Chinese; slowing approval of shipments, asking for more paper work, requiring more inspections and delays in communication. Farmers in the Midwest are losing soybean contracts to Russia and Brazil as the Chinese switch suppliers. The consequential damages to the U.S. economy are mounting while the GOP Administration thinks a trade war can be won. Corporations and consumers are accelerating purchases to beat tariff dates which will create a mirage that the tariff policies are working until January 2019 arrives and sales spiral down due to all the advance purchasing.

We appeal to the White House to end the trade war, focus on the use of WTO offices, work with our allies and come up with a negotiated agreement with that is a win-win for all. If China slips into a recession from this trade war or incurs a damaged economy it will not help U.S. businesses who are looking to China as a new high growth opportunity – the Chinese will have limited cash to buy any of our goods or services. ­­­

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab. Click on the Index Topic Name at the beginning of each post to see more posts on that topic on PC or Laptop.)

Image: powertime.co.za

The tariffs applied last year sheltered the U.S. appliance industry for washers and dryers. What happened is a case study for what is likely to happen in other sheltered industries. Retailers rushed shipments of appliances prior to the tariffs going into effect. Prices were slashed sales went up, bringing demand forward in April. By July of this year sales are down almost 3%. While appliance sales falling can be partly explained by the slowdown in housing sales, this trend does not explain the price increases buyers in the market did experience. Samsung and LG competing with U.S. manufacturers, GE and Whirlpool, increased prices from 4 – 8 % on their models due to the tariffs. U.S. manufacturers raised their prices as well, so consumers ended up paying more anyway. If anything, prices should have been going down with fewer buyers in the market, instead there was a distorted market.

Sources: Department of Commerce, The Wall Street Journal – 9/18/19

The South Korean manufacturers have already made permanent moves to end the price challenge with Samsung producing appliances in a plant near Newbury County, South Carolina beginning this past January. LG is following suit, by opening a plant near Clarksville, Tennessee this fall.

So, what has happened is consumers will pay more for appliances, and jobs will come to the U.S. which the tariffs may have intended. Consumers are paying the price of the switch and it is not clear if the consumer will be better off.

Next Steps:

With the U.S. manufacturers depending on tariff shelter protection, they may not be as competitive as they could be with their competition coming on shore to take them on from a U.S. staging point. Certainly, with plants in the U.S. there is a level playing field for all the appliance companies. Consumers are likely to pay to find out which manufacturer is best and will be around 5 years from now.

We don’t like to see the federal government picking winners and losers in the marketplace. Capitalism, entrepreneurship and innovation should take over providing the best products at the lowest price for consumers. We prefer to see the government ensuring there is a level playing field and true competition. Time will tell us if the tariff move was an good one for consumers and the economy.

Last Friday, President Trump’s tweet doubling tariffs on aluminum and steel from Turkey caused a major shock to the Turkey stock market and sent the lira spiraling down by 10 %. However, the damage was not contained to just Turkey, emerging country currencies around the world took hits, the U.S. SPX took a .71 % dive. Emerging countries with similar high debt levels like South Africa and Argentina took 2 % or more hits to their currency values. The correlation of the lira with other emerging market currencies hit a new high today, according to Bloomberg.

Sources: The Daily Shot, The Wall Street Journal – 8/13/18

Sources: The Daily Shot, The Wall Street Journal – 8/13/18

Our President chose to lob an economic bomb at a country already reeling from a 40 % drop in the lira year to date, high inflation at 15.85 %, ten year bond rate of 20 %, and a corporate $210 billion net currency account deficit owed to foreign investors.

Investors are concerned that EU banks holding loans or positions in Turkish banks could be vulnerable to losses. The European Central Bank is concerned with exposure of banks in Spain, Italy and France.

Sources: The Daily Shot, The Wall Street Journal – 8/13/18

U.S. banks do not hold many direct positions in Turkish banks or loans, but they do hold positions in EU banks in the three exposed countries.

The crisis was in the making, when President Erdogan took office in July after 15 years of rule declaring super powers to himself sending the lira into a flash crash. Over the past month Erdogan insisted on keeping interest rates low, allowing inflation to get out of hand, and used foreign investment to build shopping malls and construction projects rather than invest in industry, productivity or critical infrastructure. Today, the lira was falling quickly during the day, until its fall was steadied by Turkish central bank interventions, yet stock markets in U.S. were down with SPX losing .40 %, the Dow off by .50 %, and emerging markets down by 1.62 %. All this financial uncertainty about loans, bank exposure, and foreign capital reserves has caused investors to hit the pause button to wait and see how officials around the world respond to the crisis. The most critical question: can this financial crisis be contained to Turkey, Argentina and South Africa or will developed country markets be hit?

Next Steps:

We see economic bomb throwing via tariffs to gain supposed political advantage to secure the release of a pastor as a major mistake. The added tariff on top of present tariffs on Turkey already in financial straits just exposed other emerging markets to investor and official scrutiny causing alarm and uncertainty. Uncertainty is the big cloud growing stronger as world markets deviate from U.S. markets in the past several months.

Sources: The Daily Shot, The Wall Street Journal – 8/13/18

This divergence won’t continue, either the U.S. market will fall or the emerging markets will rise – with global economies slowing, currency weakness and tariffs it would seem that U.S. markets are likely to fall. Plus, the U.S. dollar strengthening versus emerging country currencies makes U.S. goods more expensive for global customers resulting in a reduction in U.S. sales.

Is this what the President wants; falling emerging markets eventually leading to the U.S. economy going into a recession? One crucial aspect of financial markets is that perception can become reality, just the perception that a country can’t pay its debts, or a bank may fall is enough to cause investors to run for the exits. The President by making an impulsive tweet into a fragile financial system will only lead to more uncertainty, falling markets and economic disaster. Economically damaging a NATO partner like Turkey only plays into the hands of Russia in establishing closer economic and strategic ties. America has a military partnership with Turkey at the Incirlik Air Base, where over 5,000 U.S. airmen are stationed used for monitoring Russian military exercises and staging for operations into Syria and Iraq. Undermining the economy of our NATO partner may create enough civil unrest to force us to leave the base. We need to recognize that our military presence around the world keeps countries safe for us and all companies to conduct business, otherwise markets shrink. The The White House needs to think in terms of what their tariff and protectionist policies are doing to the economies of countries our companies want to sell products to. If offshore prospective customers are in falling economies they won’t have the money to buy U.S. products. So, how will the trade deficit be reduced? These poorly thought out short term trade policies need to be ended and sound long term, trade programs focused on building economies need to be implemented. This Administration needs to follow the trade path of the past 50 years by both Democratic and Republican administrations.

Update: August 14, 2018 – President Erdogan declared the country is in an ‘economic war’ telling citizens to boycott American electronic products, sell dollars and euros to support the lira. This tit for tat retaliation is exactly what we don’t want to see trade relationships spiral into uncontrollably. What if China uses nationalism to drive boycotts of U.S. goods? The deadline for the U.S. imposing new tariffs is August 23rd we will watch the action with great concern. Economic nationalism will cause worldwide recessions and setup conditions for civil unrest. Just in, Bloomberg reports that Turkey has slapped tariffs on U.S. goods including a 50 percent tax on rice, 140 percent tax on spirits, and 120 percent on cars. Tensions continue to escalate out of control.

Two major steel companies, US Steel and Nucor, last March lobbied the Trump Administration to post tariffs on imported steel at 25 %. They are now pressuring the Administration to deny any requests for waivers from the tariffs. Over 1,600 applications have been filed for exclusion from the tariff provisions which blanketed the world including the European Union, Mexico, Canada, Japan and China. The two steel giants are in fact creating a monopoly for their steel products in the U.S.

Nucor paid for a film by presidential advisor Peter Navarro, when he was a professor at UC Irvine on the threat of China imported steel being dumped onto U.S. markets. Certainly, there are issues related to China trade practices but is using 25 % tariffs on all imported steel even from allies going to force China to change their export practices?

Next Steps:

Companies that use steel in their products are reeling from soaring price increases in steel and sourcing issues because U.S. steel producers do not make the products they need. Elite corporate CEOs are running their companies via the U.S. government to pick winners (themselves) and losers over 1,600 companies being denied exemptions to run their businesses successfully and keep jobs here in the U.S. Now, many firms are planning on moving operations to countries closer to their customers to avoid the tariffs all together – thus moving jobs out of the U.S. It seems already the tariff plan has backfired, moving jobs out of the U.S. and jeopardizing millions of jobs. We should not be tolerating this state of oligarchy, where two major companies setup tariffs to their exclusive benefit in while damaging thousands of other companies businesses and threatening millions of U.S. jobs. It is the job of our federal government to not pick winners and losers but to establish fair markets for innovation and entrepreneurship to triumph. The tariffs need to be lifted and an intelligent trade strategy in collaboriation with our allies to end China steel dumping practices be implemented.

Almond farmers in central California have seen the price for almonds drop 10 %, along with a steep drop in shipments the past several months. The steep price drop is largely due to falling shipments to China and Hong Kong, along with a bumper almond crop.

“There is an even more ominous aspect to these subsidies is the idea of ‘hunkering down’ for the long term. With no plan for ending the trade war except vague goals of ‘fair deals’ the Trump Trade War can easily get out of hand. The following analysis by Oxford Economics shows how a full-fledged trade war with China could cost the U.S. billions of dollars to the US economy and shave off 1 % cumulative GDP growth by 2020. Needless to say, a trade war of this magnitude will trigger a recession which will be deep and difficult to turnaround. By creating angst with our allies and customers, it will be difficult to win back their trust and their business.”

The trade war needs to stop now, the pause with the EU announced last week was a good start, more needs to be done with China.

“Reverse all the ill-advised, poorly throughout and threatening oriented tariffs. Work through the WTO, which the U.S. helped to create, use other means to get more fair trade deals, work with our allies to focus on specific markets and opportunities without using myopic goals missing important data – like total trade deficit in goods and services not just goods. It is not too late, the armistice announced today with the EU on any new tariffs is a good start. Will the Administration come to an armistice with China? Considering how this Administration works, we are not holding our breath – just hoping for the best but preparing for the worst.”

The Administration announced yesterday that the Department of Agriculture will begin offering direct cash subsidies to farmers impacted by the tariffs. Farmers would be compensated based on the projected size of their harvests, they can begin signing up in September. The direct payments by the government due to tariffs would be the first time ever by the Agriculture Department. In addition to direct cash payments, the government will purchase surplus food products and distribute them to food banks, schools and other nutrition programs. The cash and surplus purchase program will cost taxpayers $12 billion.

We believe the cost to taxpayers is just the start. As China and other countries hunker down, as the Administration is buying time for its tariffs, more subsidies will be implemented. Other industries in other sectors will ask for loss compensation in steel, aluminum industries and consumer products on the Administration’s tariff list.

There is an even more ominous aspect to these subsidies is the idea of ‘hunkering down’ for the long term. With no plan for ending the trade war except vague goals of ‘fair deals’ the Trump Trade War can easily get out of hand. The following analysis by Oxford Economics shows how a full-fledged trade war with China could cost the U.S. billions of dollars to the US economy and shave off 1 % cumulative GDP growth by 2020. Needless to say, a trade war of this magnitude will trigger a recession which will be deep and difficult to turnaround. By creating angst with our allies and customers, it will be difficult to win back their trust and their business.

Stop the trade war now! Reverse all the ill-advised, poorly throughout and threatening oriented tariffs. Work through the WTO, which the U.S. helped to create, use other means to get more fair trade deals, work with our allies to focus on specific markets and opportunities without using myopic goals missing important data – like total trade deficit in goods and services not just goods. It is not too late, the armistice announced today with the EU on any new tariffs is a good start. Will the Administration come to an armistice with China? Considering how this Administration works, we are not holding our breath – just hoping for the best but preparing for the worst.

When the GOP Administration decided to protect the US appliance industry by awarding tariffs of 20 % on imported washers and dryers we predicted that the price of washers and dryers would rise. These appliances are basic to every household, with price rises hurting workers the most as they have seen their wages stagnant since the last recession. The three-month price increased for washing machines and dryers by 17 %. Ouuucch.

“with a 20 % penalty on the first 1.2 million machines imported and a 50 % rate for any imports above that level. A 50 % tariff was awarded on all washing machine parts imported – all penalties are for a three year period. The administration is protecting Whirlpools’ market share of 43 %. LG responded by announcing price increases up to $50 per machine or more.”

Since January, Whirlpool responded to LG price increases raising their prices as well. We observed then too:

“These tariff actions will hurt consumers by first raising prices on imported machines then Whirlpool will raise prices by virtue of increased market strength with competitors losing share.”

So, what happened, prices have zoomed up by 17 % on all laundry appliances. The highest prices since 2006, actually durable goods prices have been good news on the inflation front declining over the past 10 years since the recession.

The Administration has had its time to perform an economic experiment on the American consumer, maybe it worked forcing Samsung and LG to startup plants in the US. However, it may just act as a catalyst for all manufacturers to keep prices high while the tariffs are in place. It’s time to examine in depth, understanding why US manufacturers are concerned about imports to answer the question if Whirlpool has 43 % market share why is it doing poorly? Economic analysis is required by experts, not shoot from the hip policies to satisfy a minority political segment that will actually get hurt hardest when the layoffs in the Midwest start happening as sales fall. The basic economic principle is that when prices rise demand falls – eventually. This administration can’t defy this principle all it tries. Let’s understand what is really happening and develop a win-win plan for consumers, manufacturers and importers.